Is Compensating Audit Committee Members with Stock Options Associated with the Likelihood of Internal Control Weaknesses?

18 Pages Posted: 27 Sep 2010

See all articles by Charles P. Cullinan

Charles P. Cullinan

Bryant University

Hui Du

University of Houston, Clear Lake

Wei Jiang

California State University, Fullerton

Abstract

We examine whether firms with a stock option plan for their audit committee members are more likely to have internal control weaknesses. Using a sample of 486 US firms, we find that firms with a stock option plan for their audit committee members are significantly more likely to report an internal control weakness than firms without such a stock option compensation plan. Our results support a UK government report which indicates that compensating outside directors with stock options may diminish the effectiveness of these directors. Our findings suggest that stock option compensation plans may adversely affect the functioning of a firm's audit committee.

Suggested Citation

Cullinan, Charles P. and Du, Hui and Jiang, Wei, Is Compensating Audit Committee Members with Stock Options Associated with the Likelihood of Internal Control Weaknesses?. International Journal of Auditing, Vol. 14, No. 3, pp. 256-273, November 2010, Available at SSRN: https://ssrn.com/abstract=1681707 or http://dx.doi.org/10.1111/j.1099-1123.2010.00416.x

Charles P. Cullinan (Contact Author)

Bryant University ( email )

1150 Douglas Pike
College of Business
Smithfield, RI 02917-1284
United States
401-232-6421 (Phone)
401-232-6319 (Fax)

Hui Du

University of Houston, Clear Lake ( email )

Wei Jiang

California State University, Fullerton

800 N State College St
Fullerton, CA 92831
United States

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